OCCASIONAL PAPERS - AARP

[Pages:31]Office of Academic Affairs

OCCASIONAL PAPERS

Number 5 June 2008

The Issues and Opportunities of Entrepreneurship After Age 50

by

Edward G. Rogoff Baruch College, CUNY

THE ISSUES AND OPPORTUNITIES OF ENTREPENEURSHIP AFTER AGE 50

Edward G. Rogoff, Ph.D. Professor of Management and Academic Director, Lawrence N. Field Center for Entrepreneurship

Baruch College, CUNY New York, NY

TABLE OF CONTENTS

Introduction.................................................................................................................................3 The Characteristics of Entrepreneurship.....................................................................................4

Why Do People Become Entrepreneurs?........................................................................5 The Downsides of Entrepreneurship...............................................................................9 Measuring the Prevalence and Characteristics of Later-Life Entrepreneurship .......................10 Workforce Studies ........................................................................................................12 Census Data ..................................................................................................................13 A Future of Increasing Opportunities for Later-Life Entrepreneurs.........................................14 Factors that Influence Outcomes of Entrepreneurial Activity ..................................................16 The Impact of Age on an Entrepreneur's Time Horizon and Risk Tolerance ..........................20 Tools for Building Success for Later-Life Entrepreneurs.........................................................21 Conclusion: Later-Life Entrepreneurs Have the Needs and Ability; Now They Require the Tools to Minimize Risk.................................................................24 References.................................................................................................................................26

? 2008, AARP. All rights reserved.

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INTRODUCTION Entrepreneurship is a major force in the U.S. economy, encompassing businesses from

part-time, home-based work to major enterprises backed by sophisticated venture capital funding. While there are many ways to count entrepreneurship's impact, just consider that various studies using varying methodologies have concluded that one household in seven earns income from an entrepreneurial venture (Winter, et al. 1998), that there are 12 million business owner operated firms (Dennis, 2007), and that more than 60% of net new jobs each year come from small firms (U.S. Dept. of Labor, 2005). Although entrepreneurship has received significant and growing attention generally, as some of the studies discussed below show as well as through increased media attention, it is only recently been recognized as an important activity among older Americans. While the data are incomplete, the evidence is clear that entrepreneurship among older Americans is a major phenomenon. This paper provides an overview of the field of study of older entrepreneurs, by applying accepted concepts of entrepreneurship study to an older population. The paper also proposes steps for advancing the field academically and practically.

Research by AARP (2002b) found that 69% of people between the ages of 45 and 74 who are still in the workforce plan to continue working in some way beyond their normal retirement. This finding was largely duplicated in a subsequent AARP (2003) study among workers ages 50 to 70, 68% of whom reported that they plan to work in some capacity post-retirement. According to a study by Thrivent (2006), many of these people will choose entrepreneurship in the form of self-employment, business ownership, or direct investment in a small business as post-retirement ventures. The Thrivent study also found that 71% of people ages 45 to 64 believe they will lack the funds in retirement to fulfill their plans, and 43% plan to work either

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full- or part-time in retirement. More specifically, 34% of the sample felt that it was very or somewhat likely that they would start a business following retirement from their current employment (Thrivent, 2006). Studies carried out by AARP in 1998 and 2003 found 14% and 12% respectively plan on starting a new business in retirement (AARP, 1998 and 2004).

Entrepreneurship delivers many benefits whether people consider themselves in the postretirement phase of their careers or not. Entrepreneurship is flexible, allowing individuals to design their ventures to suit their needs, whether limiting work hours, working alone or with partners, concentrating on current income or building future value, or focusing on long- or shortterm goals. For older workers who prefer traditional employment, entrepreneurship becomes a choice when they encounter age discrimination, face an unwanted prospect of relocation, or find the available options unattractive because of low pay.

THE CHARACTERISTICS OF ENTREPRENEURSHIP There is no single accepted definition of entrepreneurship. Some people think of

entrepreneurship as aggressive, creative, and innovative business creation. Others define it as simply identical to self-employment. In the academic world, two definitions predominate. The first, a process-focused definition, views entrepreneurship as the process of pursuing opportunities and recruiting the resources needed to bring these ventures to reality (Stevenson and Jarillo, 1990; Ireland, Hitt, and Sirmon, 2003). The second definition is structurally oriented and considers the legal structure utilized or the time commitment that a person has to the venture. The legal entity definition involves a governing structure such as a corporation or partnership and is typified by the Census Bureau research discussed later in this paper. Many studies, however, use a time commitment definition established in hours per week of work on the

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venture. Major studies employing this approach have often used six hours per week as the minimum required time (Heck and Scannell, 1999).

Overall, entrepreneurship can reasonably be seen as money-making through participation in any parts of the process of establishing, operating, or investing in business ventures. This definition covers self-employment, including innovative as well as copycat businesses, and makes no requirements as to the hours spent in the business, the percentage of ownership, or legal structure, nor does it make any assumptions about the size of the financial ambitions of the entrepreneur. In fact, making money does not have to be the sole or even main goal. As discussed below, many entrepreneurs have personal or social-purpose goals as their main motivation. This broad definition suits later-life entrepreneurs because it encompasses the multitude of strategies that they employ to achieve their varied goals through business participation. Why Do People Become Entrepreneurs?

People become entrepreneurs because they either have to or they want to. The first group includes workers who are unable to obtain wage and salary employment because of economic conditions that limit their opportunities, such as a weak labor market or discrimination due to factors such as gender, ethnicity, or age. The second group consists of people with interests and dreams they want to pursue, such as becoming commercially successful inventors, or amateur chefs who hope to open restaurants. This second group includes individuals with lifestyle issues who want to be their own bosses or have more flexible work hours. The National Minority Business Owners Survey (Puryear, Rogoff, Lee, and Heck, 2003) collected data on both minority and non-minority business owners. This survey shows that age 55+ entrepreneurs are more motivated by the opportunity to utilize their skills and abilities, make a contribution to society,

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and achieve work satisfaction than their younger counterparts. The 2006 Thrivent study revealed that about one-third of those who consider themselves somewhat or very likely to be entrepreneurs when they retire also mention starting a business as one of the three goals they most wish to accomplish in retirement. If we can generalize from this finding, then the "have-tobe" entrepreneurs represent about two-thirds of later-life entrepreneurs, while the "want-to-be" entrepreneurs represent about one-third.

It would seem that the following are among the motivators for the "have-to-be" entrepreneur:

1. Economic conditions. A weak overall economy or an economy that is weak in only one sector may drastically limit employment opportunities. A pilot laid off from an airline may have trouble replacing his or her job if the airline industry is suffering a general slowdown. One option for the pilot is to begin an entrepreneurial venture within the airline industry, such as starting an air-taxi service, or entering into another industry entirely.

2. Discrimination. Sometimes studied under the rubric of "the theory of the disadvantaged worker" in the academic literature, discrimination holds that individuals who face prejudice often turn to entrepreneurship. Light and Rosenstein (1995), Min (1984), and Evans and Leighton (1987) provide evidence of this relationship. An immigrant who may have been an executive in a bank in his home country may find himself offered only entry-level positions at banks in the U.S. Many immigrants respond to this lack of adequate employment opportunity by using their education, prior experience, and fluency in languages as tools to start or purchase a business.

3. Lack of resources. It is perhaps ironic that a lack of personal resources such as education, money, credit, and an established business network may actually represent a starting

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point for many entrepreneurs. The academic literature refers to this challenge as "the theory of liquidity constraint" and posits that individuals with a lower stock of such personal resources are generally more constrained in their employment options than in their entrepreneurial options. Among those researchers who have found evidence of this effect are Light and Rosenstein (1995), Evans and Leighton (1987), and Bates (1990).

Of course, people in this group are also limited in their entrepreneurial options. But, because of the wide array of entrepreneurial opportunities, entrepreneurship can be the best available course of action for an individual whose personal resources are minimal, including low education, poor English skills, and no financial assets. Among researchers who have explored this issue are Brush (1992) and Evans and Jovanovic (1989). While a person with limited choices may begin to generate income by service work such as gardening, home cleaning, or dog walking, it is often a first step in a process that eventually leads to obtaining additional clients and hiring employees so that the business can be expanded.

Family responsibilities such as raising children, taking care of an elderly or infirm family member, or working part-time in an existing family business can also constrain an aspiring entrepreneur's ambitions.

The following are the main motivators for the "want-to-be entrepreneur:" 1. Following the dream. Many people harbor dreams to be involved in work that is removed from their main careers. They may yearn to be a musician, a stamp collector, an owner of a bed and breakfast, or someone who starts a non-profit venture. Others may have a specific dream related to the industry in which they have worked for many years. 2. Managing family and time constraints. Many people who start their own businesses while still employed must face the initial time restrictions imposed by existing full-time

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